Minor pharmas could become next prey

The $2.7 billion bid for hospital operator
Healthscope
has turned the corporate action spotlight on the health care sector with activity potentially concentrated at the smaller end of the market.

Predators could be spoilt for choice when it comes to hunting for depressed assets. Given the fragile appetite for risk and tight credit conditions, some experts believe bidders would generally be keener on making smaller bolt-on acquisitions that are easier to pull off and integrate.

Animal healthcare company
Stirling Products
is seizing the opportunity to buy distressed assets. It announced plans to save medical information technology firm TeleMedCare Holdings from receivership, while the bid for struggling
Sigma Pharmaceuticals
by South Africa-based Aspen Pharmacare Holdings is still being worked through.

Further, there is growing speculation that
Starpharma Holdings
could be the first Australian biotech to be taken over in a long time after the £2.5 billion ($4.3 billion) cash offer for SSL International.

The buy-out news didn’t do much for Stirling’s share price, which was flat at 0.9¢ in early trade as there is still uncertainty as to when the company will be able to post a profit, but Starpharma jumped a further 3.9 per cent, or 2¢, to 53.5¢. If it closes at this level, it would take its two-day gain to 9 per cent – its best two-session gain this year.

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Starpharma has developed a gel that would protect users from sexually transmitted diseases, such as HIV, during intercourse. It licensed the product to condom maker SSL International, which is backing the takeover offer from health and personal care products group Reckitt Benckiser.

“This could definitely put Starpharma in play as [Reckitt] may find it more attractive to take Starpharma out as well, instead of paying out the royalty," said the fund manager of Naos Asset Management, Sebastian Evans.

Even without the corporate appeal, he believes the stock is an “outstanding value play" over the next 12 months as the company has three major products under development and will generate its first recurring net profit in 2011-12.

Mr Evans estimates that net profit will grow from $4 million in financial 2012 to $16 million in 2012-13 and $31 million the following year. Once all three products are commercialised in 2015-16, he expects net profit will go over $70 million.

A buy-out from its larger licensing partner could pave the way for similar deals across the sector as there are a number of late-stage medical companies that have partnered with industry giants.

“This makes sense in theory, but historically we haven’t really seen big pharma or big medical device companies coming to Australia and pick up companies," said the director of research for RBS Morgans, Scott Power.

“A case in point is Eli Lilly’s deal with
Acrux
. They’ve done a nice licensing deal with Acrux and you can sort of speculate as to why they didn’t take it out instead."

But history may not necessarily be a good guide this time round as large pharmaceutical companies have an impending need to refill their drug pipeline now because a number of key drugs are coming off patents between now and the next few years.

Acrux has developed a spray on technology to deliver drugs and had struck a global exclusive licensing deal to commercialise Acrux’s experimental underarm testosterone solution, AXIRON.

Acrux will receive a $87 million milestone payment once US medical regulators grant AXIRON a marketing authorisation to sell the drug, and Mr Power said that would be a huge catalyst for the stock.

Acrux has received $50 million upfront from Eli Lilly and reported a cash holding of $9.6 million at the end of December. On receipt of the next milestone payment, its cash position would be about $200 million, an impressive sum considering the stock has a market capitalisation of $289 million.

From that perspective, a bid from Eli Lilly could make a lot sense as Acrux could get up to $195 million in further milestone payments on top of future royalty payments.

RBS Morgans is urging investors to buy the stock as it is confident that AXIRON will be approved sometime in the March quarter of 2011, and Acrux has indicated it will start paying a regular dividend from that point. The stock has tumbled 28 per cent since hitting a high of $2.50 in mid-March. It was trading flat in early trade at $1.80 compared with RBS Morgans’ price target of $3.17 a share.

Another emerging medical company that could be taken out by its licensing partner is laboratory products developer
LBT Innovations
.

The company has a licensing deal for its flagship product with French diagnostics firm bioMérieux, which holds a 10 per cent stake in the market minnow.